US Tax Filing IRS Form 5471 Foreign Interests

simon

Simon Misiewicz

4th August 2021

The frequently asked questions about IRS Form 5471

As specialist tax accountants, we are regularly asked about Form 5471. We will look to answer the below questions in this Article.

“Are you paying too much tax?”

“What are the basics of Form 5471?”

“Who needs to file Form 5471?”

“When should Form 5471 be filed?”

“What information is included in Form 5471?”

“How long does Form 5471 take to prepare?”

“What is the penalty for not filing Form 5471?”

“Are there different Form 5471 schedules?”

“What is a Controlled Foreign Corporation?”

“How does this affect our UK readers?”

How much tax will you pay in the UK?

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Are you paying too much tax?

US/UK ex-pat tax experts know that US tax laws and regulations can be confusing.

There are different regulations in place compared to the UK, and the penalties for non-compliance or late filing of forms can be severe in the US.

The penalties for inaccurate and/or late filing for Form 5471 are severe.

It is important to get the right tax advice from specialist US tax accountants.

There are many reasons why British people living in the United States pay far more tax than they need.

This is because:

-They do not know what they do not know.

-They have not spoken to a tax specialist that knows all the UK and US tax laws.

-Their accountants in the UK are not knowledgeable when it comes to the US tax laws under the IRS.

-Their CPAs are not knowledgeable when it comes to the UK tax laws under HMRC.

What are the basics of IRS Form 5471?

Form 5471 is officially called the Information Return of US Persons concerning Certain Foreign Corporations.

It is an information return, not a tax return, and its purpose is to file information by US taxpayers that have an interest in certain foreign corporations.

This is so that the IRS has a record of which US citizens and residents have ownership in foreign corporations.

Since being introduced in 1962, Form 5471 has been considered one of the most difficult and time-consuming US tax forms to prepare.

Some industry commentators have claimed that efforts to require US taxpayers to repatriate their foreign earnings under the Tax Cuts and Jobs Act 2017 (TCJA) have further complicated Form 5471.

Before the passing of TCJA Form 5471 was comprised of 11 schedules and three worksheets.

Being aware of what foreign corporation shares are owned by US citizens helps the IRS prevent people from hiding overseas assets. It also shows the IRS in which countries these financial interests are held.

Form 5471 is similar to Form 1120, the US Corporation Income Tax Return, because it requires similar disclosures and large amounts of information.

Form 5471 is informational; it doesn’t usually affect the amount you pay in taxes unless you fail to file it, then heavy penalties are in place.

Reporting requirements under Form 5471 can be as simple as what percentage of stock the US taxpayer owns and company information.

In other cases, the reporting information required can be as complex as the corporation’s entire income from financial statements and balance sheets.

Form 5471 can be due to various factors to be considered when determining which forms and schedules are relevant for an individual US shareholder’s circumstances.

Some of these factors include:

– The ownership % held by the US taxpayer in the foreign corporation

– The ownership % held by the other US and non-US shareholders in the foreign corporation

– Their relationship to the US taxpayer

Each scenario needs to be thoroughly examined and is best done with the assistance of an Expat Tax Adviser.

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Who needs to file IRS Form 5471?

Any US citizen, partnership, trust, corporation, or estate with at least 10% ownership in a foreign corporation needs to file Form 5471. The IRS clearly outlines who must file Form 5471. This is particularly relevant to Americans that invest or live in the United Kingdom. Many Americans move from say Florida or New York to London to start employment or a business enterprise.

Certain US persons who are shareholders, officers, officers, or directors of a foreign corporation may also be required to file it.

The categories of US persons potentially liable for filing Form 5471 include:

– US citizen and resident alien individuals

– US domestic corporations

– US domestic partnerships

– US domestic trusts

The term foreign corporation includes an International Business Company (IBC) owned in part by US persons.

It also includes a foreign limited liability company.

Form 5471 is similar to the information return for a partnership, an S Corporation or a trust.

Unlike a C Corporation, the income of a foreign corporation may be either taxed to the shareholders or tax-deferred until there is a distribution or liquidation.

The Form serves multiple purposes and can be confusing to a novice.

Form 5471 should be filed as an attachment to the taxpayer’s federal income tax, partnership or exempt organisation return.

It should be filed by the due date, including any extensions for that return.

There are four categories of persons, including corporate shareholders, that may be required to file Form 5471, including:

– A US person who is an officer or director of a foreign corporation in which any US person owns 10% or more of the stock

– A person who becomes a US person while owning 10% or more stock of a foreign corporation

– A US person who had control of a foreign corporation for 30 days or more

– A US shareholder who owns stock in a foreign corporation that is a controlled foreign corporation for at least 30 days and who owned that stock on the last day of the year

For example, an American that lives in Florida moves to Manchester in the UK and wishes to start a limited company for their business. HMRC will expect the American business owner to file self-assessment tax returns in the United Kingdom as a limited company director and Corporation tax returns.

When should Form 5471 be filed? 

Form 5471 should be filed annually with the income tax return of the relevant shareholder.

For the majority of corporations, that date would be 15 March / 15 April for most individuals.

What information is included in Form 5471?

The information to be included in Form 5471 starts by listing the US shareholder’s identity and details about the foreign corporation.

It should also include information about transactions between the shareholder and the foreign corporation, original capital contributions and other relevant data.

This initial information is four pages long.

Several other schedules are required, which can add an extra seven pages.

Among the schedules to be added are the balance sheet for the corporation and the income and expense sheets for the current year.

It is a requirement of Form 5471 to provide accurate completion of all necessary information.

The required information may be as little as the identification of the US shareholder and the name and address of the foreign corporation.

In other cases, the details required to file on Form 5471 could be comprehensive, including a comprehensive balance sheet and income statement converted from multiple foreign currencies into US dollars.

If the corporation is owned by five or fewer US shareholders and each owns 10% or more of the foreign corporation, it will be deemed to be a Controlled Foreign Corporation (CFC).

More information is provided later in this article on CFCs.

In this case, all or part of the corporation’s income may be taxable to certain shareholders.

How long does Form 5471 take to prepare? 

It has been estimated that preparing Form 5471 could take up to 40 hours, not including record-keeping and the time required to learn relevant law.

The learning time would be much longer for a US person not knowledgeable of US tax law.

For an operating business with extensive transactions, the time spent could be much longer.

If the foreign corporation is dormant, completing Form 5471 should only take a few hours.

It has been estimated that for a CFC owned by one person and used as an investment entity only, around five hours would be sufficient to complete Form 5471.

Each Form 5471  preparation will be individual and bespoke.

Getting the right tax advice is critical, even for an informational return form.

What is the penalty for not filing Form 5471?

The penalty is $10,000 for each late or incomplete Form 5471 and is classed as a disclosure penalty.

It is not necessary for the foreign corporation to have any profits for this penalty to apply.

Form 5471 must be filed even if there is no taxable income to report.

If failure to file continues for more than 90 days after the date of the IRS notice, an additional $10,000 penalty will apply for each 30-day period.

The additional penalty can be added up to a maximum of $50,000 in total.

If you get a notice from the IRS of duty to file and don’t do so within 90 days, there could be a maximum fine of $60,000.

The TCJA implemented two new taxes for US owners of controlled foreign corporations.

The Transition Tax (also called IRC Section 965) and Global Intangible Low-Taxed Income or GILTI (also called IRC Section 951A) that functions as a current-year tax.

Form 5471 has moved from being an informational return to an integral part of reporting these two taxes.

Are there different Form 5471 schedules?

The Form 5471 schedules are used to satisfy the reporting requirements of transactions between foreign corporations and US persons.

The IRS has published all Form 5471 revisions, and whilst this is not essential reading, it does provide a useful insight into the ongoing development of this information return.

Within Form 5471, there are 12 schedules, which include:

– Schedule A – Stock of the Foreign Corporation

– Schedule B – US shareholders of Foreign Corporations

– Schedule C – Income Statement

– Schedule E – Income, War Profits, and Excess Profits Taxes paid or Accrued

– Schedule F – Balance Sheet

– Schedule G – Other information

– Schedule H – Current earnings and profits

– Schedule I – Summary of Shareholder’s Income from Foreign Corporation

– Schedule J – Accumulated earnings and profits of Controlled Foreign Corporations

– Schedule M – Transactions between Controlled Foreign Corporation and shareholders or other related persons

– Schedule O – Organisation od reorganisation of a Foreign Corporation, and acquisitions and dispositions of its stock

The IRS has provided information about the reporting requirements of Form 5471.

What is a Controlled Foreign Corporation? 

A Controlled Foreign Corporation (CFC) is a foreign corporation where US shareholders hold more than 50% ownership of the stock.

CFC rules are features of an income tax system designed to limit artificial tax deferral by using offshore low-taxed entities.

The rules are required only regarding the income of an entity that is not currently taxed to the owners of the entity.

Certain classes of taxpayers must include in their income certain amounts earned by foreign entities they or related people control.

The rules define the type of owners and entities affected, the type of income or investments subject to inclusion, exceptions to that inclusion, and the means of preventing double inclusion of the same income.

CFC rules have been in place in the US since 1962.

Countries with CFC rules include the UK, Germany, Japan, Australia, New Zealand, Russia, Brazil, Sweden and many more.

The CFC rules in different countries vary significantly.

You may be interested in our main Article on UK Tax status if you are looking to move to the UK or from the UK. You may also be interested to know how more about our property tax services if you are looking to invest in the UK buy to let properties.

 

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